Knowledge Series: Cross Border Mergers - A Reality

Cross-Border Mergers: A Reality — Summary

The webinar examined cross-border mergers as a tool for restructuring international operations, accessing capital, and simplifying or repositioning businesses—particularly between India and the United States. Speakers noted that the pandemic had intensified pressure on businesses to conserve cash, realign operations, and revisit financing and growth plans. A merger can help achieve these goals, but requires careful coordination across company law, foreign-exchange rules, tax, securities regulation, and local-country law.

Business and Transaction Playbook

• Start with the commercial objective. Identify whether the transaction is intended to support fundraising, overseas expansion, operational realignment, a business closure, or the relocation of intellectual property or selected operations.
• Check whether the merger is legally possible in both jurisdictions. Indian rules may permit a cross-border merger, but the other country’s laws must also allow it. The speakers described the list of eligible jurisdictions under Indian rules as broad, while cautioning that several countries do not permit such mergers with India.
• Choose the transaction form deliberately. Compare an asset acquisition with a share acquisition, and determine whether the transaction is taxable, tax-free, or partly taxable. The answer affects tax exposure, basis in assets, contract continuity, and the ability to use tax attributes.
• Model the post-merger operating structure. The disappearing company generally continues as a branch of the surviving company. Assess whether that branch can operate effectively, fund itself, hold its assets, and comply with local requirements.
• Run coordinated tax and regulatory diligence. Review tax attributes, liabilities, transfer-pricing policies, indirect taxes, financing, permits, employment, and the treatment of intellectual property before committing to the structure.
• Build a jurisdiction-specific implementation plan. In the U.S., state-level laws, taxes, incentives, and merger permissibility can vary. In India, the NCLT process and FEMA/Reserve Bank of India (RBI) rules are central.

India: Legal and Regulatory Framework

The Indian framework rests principally on the Companies Act and FEMA/RBI regulations.

• A cross-border merger requires the National Company Law Tribunal (NCLT) process. The simplified fast-track merger process available for certain domestic mergers is not available.
• The process involves clearances from relevant authorities. Listed-company transactions may also require stock-exchange and SEBI involvement.
• The RBI’s regulations provide deemed approval under the automatic route when the transaction meets applicable foreign-investment and overseas-investment rules. Existing non-compliances generally need to be regularized before beginning the process.
• The cross-border valuation must be performed by an appropriately qualified valuer in the relevant jurisdiction.
• The foreign company must be organized in a jurisdiction permitted by Indian rules, and its own domestic law must also allow the merger.
• The speakers estimated that the cross-border route could take roughly two to four months longer than the domestic fast-track route. One illustrative closure scenario was estimated at around four to six months, compared with potentially longer voluntary liquidation procedures.

Key Regulatory Issues

• No cross-border demerger route: The speakers said the current framework did not provide for cross-border demergers, citing an application that had been rejected for lack of a legal framework.
• Assets prohibited under Indian rules: If the merged company inherits an asset it is not permitted to hold, it may need to sell it within two years of the merger’s sanction, subject to the applicable rules.
• Overseas investments: An inbound merger may cancel an Indian company’s investment in the foreign company. The presenters questioned whether RBI approval may be required if applicable overseas-investment limits are exceeded.
• Branch funding and remittances: An Indian company that becomes a foreign company’s Indian branch may face a limit on remittances for recurring expenses—described as 10% of the Indian company’s average annual sales or turnover over the relevant period.
• Foreign subsidiaries and investments: A surviving Indian entity may need to meet overseas-investment limits when it inherits step-down subsidiaries or joint ventures. The speakers cited a 400% of net worth limit for certain corporate overseas investments and a US$250,000 per financial year limit for resident individuals.
• Borrowings: Overseas debt inherited by an Indian entity may need to comply with External Commercial Borrowing (ECB) conditions within two years. If it does not, repayment may be required within that period, potentially using overseas funds.
• Manufacturing operations: An Indian company that becomes a branch of a foreign company may face restrictions on conducting manufacturing activities, except in specified circumstances such as operations in a special economic zone.
• Other implementation areas: Securities rules and foreign listings, stamp duty, transfer of property, competition approvals, branch accounting, and GST credit continuity may all affect execution.

Tax and Structuring Considerations

India

• The presenters described the Indian tax treatment of inbound mergers—where a foreign company merges into an Indian company—as generally providing tax neutrality across several areas.
• They said the same clarity and exemptions do not apply to outbound mergers, where an Indian company merges into a foreign company. Such transactions require case-by-case analysis of capital gains, deemed dividends, gifting provisions, and other tax consequences.
• A merger can change the tax profile of the continuing operations. The presentation contrasted Indian corporate tax rates of approximately 25%, 29%, or 34% with a potential 43% rate for an Indian branch, depending on the circumstances discussed.
• Other issues include the treatment of accumulated losses and tax credits, tax-holiday benefits, branch profit attribution, goodwill depreciation, and transfer pricing.
• A bona fide commercial rationale is essential. Speakers also highlighted India’s anti-avoidance rules and the need to assess whether effective management of a foreign company could be considered to reside in India.

United States

U.S. tax outcomes depend on the legal form of the target and whether the buyer acquires assets or shares. The presenters discussed:

• IRC Section 367, which can impose tax on certain cross-border transfers of appreciated assets or intellectual property.
• IRC Section 368, which governs qualifying tax-free reorganizations. The discussion noted that some forms require a significant equity component—described as generally around 40%—while other forms have different ownership, voting-stock, or asset-acquisition tests.
• Sections 338(g) and 338(h)(10), which can allow a stock purchase to be treated as an asset purchase for tax purposes. A 338(g) election can create tax at both the corporate and shareholder levels; a 338(h)(10) election generally shifts tax consequences to the seller and may be more attractive in qualifying situations.
• Section 336(e), which can provide similar deemed-asset-sale treatment in certain qualifying stock dispositions, including some situations involving buyers that cannot make a 338(h)(10) election.

Buyers should evaluate whether a target’s tax attributes—such as net operating losses—can be used and who benefits from them. They should also review transfer pricing, prior tax filings, audits, indirect taxes, and any historical repatriation-related tax treatment.

The appropriate U.S. legal entity—such as a C corporation, S corporation, partnership, or LLC—depends on ownership, tax objectives, and operating plans. State taxes and incentives must be reviewed separately from federal tax.

Illustrative Merger Scenarios

The presenters outlined three hypothetical structures to show how cross-border mergers might be used. Each was expressly subject to commercial rationale, jurisdictional permissibility, tax analysis, and required approvals.

1. Externalizing an Indian business for overseas fundraising

   • Existing shareholders contribute their Indian-company shares to an Indian holding company.
   • A foreign company is established, potentially with a foreign investor.
   • The Indian holding company merges into the foreign company, which issues shares to the Indian shareholders.
   • The intended result is an overseas holding structure that may provide access to foreign fundraising and expansion opportunities.
   • The presenters noted potential RBI approval and capital-gains questions, although the tax impact could be limited if the Indian business had low value or negative net worth.

2. Closing an Indian subsidiary and moving operations or cash overseas

   • A foreign parent’s Indian subsidiary, with limited operations and no outstanding liabilities, merges into the foreign parent.
   • This may provide an alternative to voluntary liquidation, which the speakers described as potentially taking longer.
   • After the merger, the Indian business continues as a branch. Pending tax refunds may be received and remitted before the branch is closed in accordance with RBI rules.

3. Relocating intellectual property and selected operations

   • An Indian company transfers its India-specific operations to a newly established Indian subsidiary, potentially through a slump exchange.
   • The remaining Indian company then merges into the foreign parent.
   • The intended result is for selected intellectual property and operations to reside with the foreign parent, while the Indian subsidiary continues the local activities.
   • Tax treatment depends on the company’s reserves, the value and tax basis of assets, and the structure used.

The speakers also cited Tata Chemicals, Reliance Industries, and Godrej Consumer Products as examples of companies that had undertaken cross-border mergers involving foreign subsidiaries for internal realignment. They said outbound mergers remained less common, in part because of their regulatory and tax complexity.

Metrics, Limits, and Timeframes Mentioned

These figures were presented during the webinar and should be understood in the context of its discussion:

• Speakers cited cross-border transactions as making up nearly half of global M&A volume. They also referred to pandemic-era Q1 figures, though the subtitle wording does not make the precise statistic fully clear.
• Indian cross-border merger execution: around four to six months in one illustrative scenario. The regular process was said to take roughly two to four months longer than the domestic fast-track route.
• Certain inherited assets or foreign-currency borrowings: a two-year compliance or disposal window.
• Certain remittances by an Indian branch: 10% of average annual sales or turnover, as described in the presentation.
• Overseas investment limits discussed: 400% of net worth for certain corporate investments and US$250,000 per financial year for resident individuals.
• U.S. corporate tax rate cited: 21%.
• For historical COVID-19 relief, the U.S. CARES Act discussion included a temporary increase in the business-interest deduction limit from 30% to 50% and the ability to carry back certain net operating losses from 2018–2020 for five years. The speakers also mentioned PPP loan application timing and payroll-tax deferrals; these comments reflect the webinar’s period and are not current guidance.

Practical Recommendations

• Confirm that merger laws permit the transaction in both countries before developing the structure.
• Document the commercial purpose and compare merger, acquisition, liquidation, and other restructuring alternatives.
• Model tax outcomes at both the company and shareholder levels, including the post-merger branch structure.
• Test whether inherited assets, debt, subsidiaries, tax losses, and tax credits can legally and practically be retained.
• For U.S. transactions, compare asset and stock acquisitions and assess whether elections such as 338(h)(10) or 336(e) are available and beneficial.
• Include state taxes, local incentives, indirect taxes, and transfer pricing in diligence—not just federal or headline corporate tax.
• Plan the NCLT process, regulator engagement, valuations, accounting, securities compliance, and operational transition together.

Presenters and Sources

The webinar was hosted by an RBSA Advisors moderator whose name is unclear in the subtitles, and featured Ravi Mehta, Raj Tripathi, and Paul S. Helderman of Withum. The webinar and presentation were from RBSA Advisors, with U.S. tax perspectives from Withum.